Mullineaux Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 14 percent, the cost of preferred stock is 6 percent, and the cost of debt is 8 percent. The relevant tax rate is 35 percent.
a. What is Mullineaux’s WACC?
b. The company president has approached you about Mullineaux’s capital structure. He wants to know why the company doesn’t use more preferred stock financing because it costs less than debt. What would you tell the president?
> Each business day, on average, a company writes checks totaling $14,000 to pay its suppliers. The usual clearing time for the checks is four days. Meanwhile, the company is receiving payments from its customers each day, in the form of checks, totaling $
> No More Books Corporation has an agreement with Floyd Bank whereby the bank handles $4 million in collections a day and requires a $400,000 compensating balance. No More Books is contemplating canceling the agreement and dividing its eastern region so th
> In a typical month, the Jeremy Corporation receives 80 checks totaling $156,000. These are delayed four days on average. What is the average daily float?
> The Torrey Pine Corporation’s purchases from suppliers in a quarter are equal to 75 percent of the next quarter’s forecast sales. The payables period is 60 days. Wages, taxes, and other expenses are 20 percent of sales
> Iron Man Products has projected the following sales for the coming year:Sales in the year following this one are projected to be 15 percent greater in each quarter.a. Calculate payments to suppliers assuming that Iron Man places orders during each quarte
> Your firm has an average collection period of 32 days. Current practice is to factor all receivables immediately at a 1.5 percent discount. What is the effective cost of borrowing in this case? Assume that default is extremely unlikely
> Consider the following financial statement information for the Mediate Corporation:Calculate the operating and cash cycles. How do you interpret your answer?
> The Morning Jolt Coffee Company has projected the following quarterly sales amounts for the coming year:a. Accounts receivable at the beginning of the year are $360. Morning Jolt has a 45-day collection period. Calculate cash collections in each of the f
> Indicate the effect that the following will have on the operating cycle. Use the letter I to indicate an increase, the letter D for a decrease, and the letter N for no change:a. Average receivables goes up.b. Credit repayment times for customers are incr
> Rocco Corp. has a book net worth of $10,380. Long-term debt is $7,500. Net working capital, other than cash, is $2,105. Fixed assets are $15,190. How much cash does the company have? If current liabilities are $1,450, what are current assets?
> Based on the following information, calculate the expected return and standard deviation for the two stocks:,,,
> Below are the most recent balance sheets for Country Kettles, Inc. Excluding accumulated depreciation, determine whether each item is a source or a use of cash, and the amount:,,,
> Here are some important fi gures from the budget of Nashville Nougats, Inc., for the second quarter of 2009:The company predicts that 5 percent of its credit sales will never be collected, 35 percent of its sales will be collected in the month of the sal
> The following is the sales budget for Trickle, Inc., for the first quarter of 2009:Credit sales are collected as follows:65 percent in the month of the sale20 percent in the month after the sale15 percent in the second month after the saleThe accounts re
> In the previous problem, suppose the company instead decides on a four-for-one stock split. The firm’s 85-cent per share cash dividend on the new (post-split) shares represents an increase of 10 percent over last year’
> The company with the common equity accounts shown here has declared a 15 percent stock dividend when the market value of its stock is $35 per share. What effects on the equity accounts will the distribution of the stock dividend have?,,,
> The market value balance sheet for Vena Sera Manufacturing is shown here. Vena Sera has declared a 25 percent stock dividend. The stock goes ex dividend tomorrow (the chronology for a stock dividend is similar to that for a cash dividend). There are 12,0
> In the previous problem, suppose Chevelle has announced it is going to repurchase $10,400 worth of stock. What effect will this transaction have on the equity of the firm? How many shares will be outstanding? What will the price per share be after the re
> The balance sheet for Chevelle Corp. is shown here in market value terms. There are 8,000 shares of stock outstanding.The company has declared a dividend of $1.30 per share. The stock goes ex dividend tomorrow. Ignoring any tax effects, what is the stock
> Red Rocks Corporation (RRC) currently has 350,000 shares of stock outstanding that sell for $90 per share. Assuming no market imperfections or tax effects exist, what will the share price be after:a. RRC has a five-for-three stock split?b. RRC has a 15 p
> For the company in Problem 2, show how the equity accounts will change if:Problem 2:The owners’ equity accounts for Quadrangle International are shown here:a. Quadrangle declares a four-for-one stock split. How many shares are outstandi
> Based on the following information, calculate the expected return:,,,
> The owners’ equity accounts for Quadrangle International are shown here:a. If Quadrangle stock currently sells for $30 per share and a 10 percent stock dividend is declared, how many new shares will be distributed? Show how the equity a
> So Much, Inc., has declared a $4.60 per share dividend. Suppose capital gains are not taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be withheld at the time the dividend is paid. So Much sells for $80.37 per share, a
> ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $600,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $300,000 and the interest rate on its debt is 8 perc
> Seether, Inc., a prominent consumer products firm, is debating whether to convert its all-equity capital structure to one that is 35 percent debt. Currently, there are 8,000 shares outstanding, and the price per share is $55. EBIT is expected to remain a
> Ignoring taxes in Problem 6, what is the price per share of equity under Plan I? Plan II? What principle is illustrated by your answers?Problem 6:Keenan Corp. is comparing two different capital structures. Plan I would result in 7,000 shares of stock and
> Keenan Corp. is comparing two different capital structures. Plan I would result in 7,000 shares of stock and $160,000 in debt. Plan II would result in 5,000 shares of stock and $240,000 in debt. The interest rate on the debt is 10 percent.a. Ignoring tax
> In Problem 4, use M&M Proposition I to find the price per share of equity under each of the two proposed plans. What is the value of the firm?Problem 4:James Corporation is comparing two different capital structures: an all-equity plan (Plan I) and a lev
> James Corporation is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 160,000 shares of stock outstanding. Under Plan II, there would be 80,000 shares of stock outs
> Suppose the company in Problem 1 has a market to- book ratio of 1.0.Problem 1:Maynard, Inc., has no debt outstanding and a total market value of $250,000. Earnings before interest and taxes, EBIT, are projected to be $28,000 if economic conditions are no
> Repeat parts (a) and (b) in Problem 1 assuming Maynard has a tax rate of 35 percent.Parts (a) and (b) in Problem 1:a. Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued. Also calculate the percentage c
> Based on the following information, calculate the expected return:,,,
> In Problem 14, what is the cost of equity after recapitalization? What is the WACC? What are the implications for the firm’s capital structure decision?Problem 14:Frederick & Co. expects its EBIT to be $92,000 every year forever. The firm can borrow at 9
> Frederick & Co. expects its EBIT to be $92,000 every year forever. The firm can borrow at 9 percent. Frederick currently has no debt, and its cost of equity is 15 percent. If the tax rate is 35 percent, what is the value of the firm? What will the value
> Empress Corp. has no debt but can borrow at 8.2 percent. The firm’s WACC is currently 11 percent, and the tax rate is 35 percent.a. What is the company’s cost of equity?b. If the firm converts to 25 percent debt, what will its cost of equity be?c. If the
> Maxwell Industries has a debt–equity ratio of 1.5. Its WACC is 10 percent, and its cost of debt is 7 percent. The corporate tax rate is 35 percent.a. What is the company’s cost of equity capital?b. What is the company’s unlevered cost of equity capital?c
> In the previous question, suppose the corporate tax rate is 35 percent. What is EBIT in this case? What is the WACC? Explain.Previous question:Wood Corp. uses no debt. The weighted average cost of capital is 9 percent. If the current market value of the
> Wood Corp. uses no debt. The weighted average cost of capital is 9 percent. If the current market value of the equity is $23 million and there are no taxes, what is EBIT?
> Maynard, Inc., has no debt outstanding and a total market value of $250,000. Earnings before interest and taxes, EBIT, are projected to be $28,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 30 percen
> Left Turn, Inc., has 120,000 shares of stock outstanding. Each share is worth $94, so the company’s market value of equity is $11,280,000. Suppose the firm issues 25,000 new shares at the following prices: $94, $90, and $85. What will the effect be of ea
> The Raven Co. has just gone public. Under a firm commitment agreement, Raven received $18.20 for each of the 10 million shares sold. The initial offering price was $20 per share, and the stock rose to $25.60 per share in the first few minutes of trading.
> In the previous problem, if the SEC fi ling fee and associated administrative expenses of the offering are $900,000, how many shares need to be sold?Previous problem:The Educated Horses Corporation needs to raise $60 million to finance its expansion into
> You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 14 percent and Stock Y with an expected return of 10.5 percent. If your goal is to create a portfolio with an expected return of 12.4 percent, how much m
> The Educated Horses Corporation needs to raise $60 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. If the offer price is $21 per share and the company’s
> The Woods Co. and the Mickelson Co. have both announced IPOs at $40 per share. One of these is undervalued by $7, and the other is overvalued by $5, but you have no way of knowing which is which. You plan to buy 1,000 shares of each issue. If an issue is
> Red Shoe Co. has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering. It has correctly determined that as a result of the rights offering, the share pric
> The Clifford Corporation has announced a rights offer to raise $40 million for a new journal, the Journal of Financial Excess. This journal will review potential articles after the author pays a nonrefundable reviewing fee of $5,000 per page. The stock c
> Big Time, Inc., is proposing a rights offering. Presently there are 500,000 shares outstanding at $81 each. There will be 60,000 new shares offered at $70 each.a. What is the new market value of the company?b. How many rights are associated with one of t
> For the firm in Problem 7, suppose the book value of the debt issue is $80 million. In addition, the company has a second debt issue on the market, a zero coupon bond with seven years left to maturity; the book value of this issue is $35 million, and the
> Jiminy’s Cricket Farm issued a 30-year, 8 percent semiannual bond 7 years ago. The bond currently sells for 95 percent of its face value. The company’s tax rate is 35 percent.a. What is the pretax cost of debt?b. What is the after tax cost of debt?c. Whi
> Waller, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 15 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments and has an embedded cost of 7 percent annually. What i
> Holdup Bank has an issue of preferred stock with a $6 stated dividend that just sold for $96 per share. What is the bank’s cost of preferred stock?
> You own a portfolio that is 60 percent invested in Stock X, 25 percent in Stock Y, and 15 percent in Stock Z. The expected returns on these three stocks are 9 percent, 17 percent, and 13 percent, respectively. What is the expected return on the portfolio
> Suppose In a Found Ltd. just issued a dividend of $1.43 per share on its common stock. The company paid dividends of $1.05, $1.12, $1.19, and $1.30 per share in the last four years. If the stock currently sells for $45, what is your best estimate of the
> Stock in Country Road Industries has a beta of .85. The market risk premium is 8 percent, and T-bills are currently yielding 5 percent. The company’s most recent dividend was $1.60 per share, and dividends are expected to grow at a 6 percent annual rate
> The Up and Coming Corporation’s common stock has a beta of 1.05. If the risk-free rate is 5.3 percent and the expected return on the market is 12 percent, what is the company’s cost of equity capital?
> Given the following information for even flow Power Co., find the WACC. Assume the company’s tax rate is 35 percent.Debt: 8,000 6.5 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 92 percent of par; the bonds make se
> Jungle, Inc., has a target debtequity ratio of 1.05. Its WACC is 9.4 percent, and the tax rate is 35 percent.a. If Jungle’s cost of equity is 14 percent, what is its pretax cost of debt?b. If instead you know that the after tax cost of debt is 6.8 percen
> In Problem 12, suppose the most recent dividend was $4.10 and the dividend growth rate is 6 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The
> Filer Manufacturing has 11 million shares of common stock outstanding. The current share price is $68, and the book value per share is $6. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $70 million, has
> Suppose the returns on long-term corporate bonds and T-bills are normally distributed. Based on the historical record, use the cumulative normal probability table (rounded to the nearest table value) in the appendix of the text to answer the following qu
> You want to create a portfolio equally as risky as the market, and you have $1,000,000 to invest. Given this information, fi ll in the rest of the following table:,,,
> Suppose the returns on large-company stocks are normally distributed. Based on the historical record, use the cumulative normal probability table (rounded to the nearest table value) in the appendix of the text to determine the probability that in any gi
> Consider the following information about three stocks:a. If your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the portfolio expected return? The variance? The standard deviation?b. If the expected T-bill rate is 3.80 perc
> Look at Table 12.1 and Figure 12.7 in the text. When were T-bill rates at their highest over the period from 1926 through 2007? Why do you think they were so high during this period? What relationship underlies your answer?Table 12.1:Figure 12.7:,,,
> Given the information in Problem 10, what was the average real risk-free rate over this time period? What was the average real risk premium?Problem 10:suppose the average inflation rate over this period was 3.5 percent and the average T-bill rate over th
> For Problem 9, suppose the average inflation rate over this period was 3.5 percent and the average T-bill rate over the period was 4.2 percent.Problem 9:You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 7 pe
> You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 7 percent, - 12 percent, 11 percent, 38 percent, and 14 percent.a. What was the arithmetic average return on Crash-n-Burn’s stock over this five year period?
> Refer to Table 12.1 in the text and look at the period from 1970 through 1975.Table 12.1:a. Calculate the arithmetic average returns for large-company stocks and T-bills over this period.b. Calculate the standard deviation of the returns for large-compan
> Using the following returns, calculate the arithmetic average returns, the variances, and the standard deviations for X and Y.,,,
> Fama’s Llamas has a weighted average cost of capital of 8.9 percent. The company’s cost of equity is 12 percent, and its pretax cost of debt is 7.9 percent. The tax rate is 35 percent. What is the company’s target debt equity ratio?
> What was the average annual return on large-company stock from 1926 through 2007:a. In nominal terms?b. In real terms?
> Suppose you bought a 7 percent coupon bond one year ago for $1,040. The bond sells for $1,070 today.a. Assuming a $1,000 face value, what was your total dollar return on this investment over the past year?b. What was your total nominal rate of return on
> Rework Problems 1 and 2 assuming the ending share price is $83.Problems 1:what was the dividend yield? The capital gains yield?Problems 2:Suppose a stock had an initial price of $91 per share, paid a dividend of $2.40 per share during the year, and had a
> In Problem 1, what was the dividend yield? The capital gains yield?Problem 1:Suppose a stock had an initial price of $91 per share, paid a dividend of $2.40 per share during the year, and had an ending share price of $102. Compute the percentage total re
> Suppose a stock had an initial price of $91 per share, paid a dividend of $2.40 per share during the year, and had an ending share price of $102. Compute the percentage total return
> Atreides International has operations in Arrakis. The balance sheet for this division in Arrakeen solaris shows assets of 23,000 solaris, debt in the amount of 9,000 solaris, and equity of 14,000 solaris.a. If the current exchange ratio is 1.20 solaris p
> You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF 24 million. The cash flows from the project would be SF 6.6 million per year for the next five years. The dollar required retu
> Lakonishok Equipment has an investment opportunity in Europe. The project costs €14 million and is expected to produce cash flows of €2.1 million in year 1, €3.4 million in year 2, and €4.3 million in year 3. The current spot exchange rate is $1.28€; the
> The Silver Spokes Bicycle Shop has decided to offer credit to its customers during the spring selling season. Sales are expected to be 500 bicycles. The average cost to the shop of a bicycle is $490. The owner knows that only 96 percent of the customers
> Happy Times currently has an all-cash credit policy. It is considering making a change in the credit policy by going to terms of net 30 days. Based on the following information, what do you recommend? The required return is .95 percent per month.,,,
> Sixx AM Manufacturing has a target debt equity ratio of .65. Its cost of equity is 15 percent, and its cost of debt is 9 percent. If the tax rate is 35 percent, what is the company’s WACC?
> The Harrington Corporation is considering a change in its cash-only policy. The new terms would be net one period. Based on the following information, determine if Harrington should proceed or not. The required return is 2.5 percent per period.,,,
> Cow Chips, Inc., a large fertilizer distributor based in California, is planning to use a lockbox system to speed up collections from its customers located on the East Coast. A Philadelphia-area bank will provide this service for an annual fee of $20,000
> Bird’s Eye Tree houses, Inc., a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. It therefore is considering using a lockbox system offered by a bank located in Pittsburgh. The bank
> Rework Problem 15 assuming:Problem 15:Wildcat, Inc., has estimated sales (in millions) for the next four quarters as follows:Wildcat’s purchases from suppliers in a quarter are equal to 45 percent of the next quarter’s
> Wildcat, Inc., has estimated sales (in millions) for the next four quarters as follows:Sales for the first quarter of the year after this one are projected at $240 million. Accounts receivable at the beginning of the year were $68 million. Wildcat has a
> A bank offers your firm a revolving credit arrangement for up to $70 million at an interest rate of 2.3 percent per quarter. The bank also requires you to maintain a compensating balance of 4 percent against the unused portion of the credit line, to be d
> You’ve worked out a line of credit arrangement that allows you to borrow up to $50 million at any time. The interest rate is .64 percent per month. In addition, 5 percent of the amount that you borrow must be deposited in a non-interest-bearing account.
> Fly chucker Corporation is evaluating an extra dividend versus a share repurchase. In either case, $9,000 would be spent. Current earnings are $1.30 per share, and the stock currently sells for $64 per share. There are 1,000 shares outstanding. Ignore ta
> In the previous problem, suppose you want only $750 total in dividends the first year. What will your homemade dividend be in two years?Previous problem:You own 1,000 shares of stock in Avondale Corporation. You will receive a $2.30 per share dividend in
> You own 1,000 shares of stock in Avondale Corporation. You will receive a $2.30 per share dividend in one year. In two years, Avondale will pay a liquidating dividend of $53 per share. The required return on Avondale stock is 15 percent. What is the curr
> The Down and Out Co. just issued a dividend of $2.40 per share on its common stock. The company is expected to maintain a constant 5.5 percent growth rate in its dividends indefinitely. If the stock sells for $52 a share, what is the company’s cost of eq
> You own a portfolio that has $2,950 invested in Stock A and $3,700 invested in Stock B. If the expected returns on these stocks are 11 percent and 15 percent, respectively, what is the expected return on the portfolio?
> The Veblen Company and the Knight Company are identical in every respect except that Veblen is not levered. Financial information for the two firms appears in the following table. All earnings streams are perpetuities, and neither firm pays taxes. Both f
> Until It Sleeps Corporation expects an EBIT of $14,000 every year forever. Until It Sleeps currently has no debt, and its cost of equity is 16 percent. The firm can borrow at 9 percent. If the corporate tax rate is 35 percent, what is the value of the fi
> Tool Manufacturing has an expected EBIT of $64,000 in perpetuity and a tax rate of 35 percent. The firm has $95,000 in outstanding debt at an interest rate of 8.5 percent, and its unlevered cost of capital is 15 percent. What is the value of the firm acc
> Knight Inventory Systems, Inc., has announced a rights offer. The company has announced that it will take four rights to buy a new share in the offering at a subscription price of $35. At the close of business the day before the ex-rights day, the compan
> Roth Corp. wants to raise $5.6 million via a rights offering. The company currently has 650,000 shares of common stock outstanding that sell for $50 per share. Its underwriter has set a subscription price of $23 per share and will charge the company a 6
